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Commercial Loans

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A commercial loan is a debt-based funding agreement between a business (the borrower) and a financial institution (the lender), where the borrowed money is used exclusively for **business purposes**. It’s distinct from consumer loans (like mortgages, auto loans, or personal loans) which are for individual, personal, or household use.

A commercial loan is money borrowed by a company from a bank or other lender specifically to pay for business-related costs or investments. The business promises to pay it back with interest over an agreed period, and it usually has to put up some of its property or assets as security for the loan.

**Key Takeaway:** The defining feature is the **business purpose** of the funds. It’s a formal financing tool designed to help businesses operate, grow, and invest.

Borrower: Primarily businesses

 

*   Proprietary Limited (Pty Ltd) organisations

*   Partnerships

*   Sole proprietorships

*   Non-profit organizations

*   Real estate investors/developers (for investment properties, not primary residences)

Working Capital:Covering day-to-day operational expenses (payroll, rent, utilities).

* Capital Expenditures:** Purchasing equipment, machinery, vehicles, or technology.


* Inventory Purchases:** Buying goods for resale or raw materials for production.

* Commercial Real Estate:** Acquiring, developing, or renovating office buildings, retail spaces, warehouses, industrial facilities, or multi-family rental properties.


* Business Expansion:** Opening new locations, launching new products/services, entering new markets.


* Business Acquisition:** Financing the purchase of another company.


* Refinancing Existing Debt:** Consolidating other business debts or securing better terms.


* Bridge Financing:** Covering short-term cash flow gaps or interim financing needs.

Collateral: Commercial loans are often **secured**

* The borrower pledges assets as collateral. If the borrower defaults, the lender can seize and sell these assets to recover the loan amount. Common collateral includes:

*   Commercial real estate*   Business equipment and inventory

*   Accounts receivable

*   Business assets (sometimes personal assets of owners for small businesses, often via a personal guarantee)

*   Cash savings or investments

*   *Unsecured* commercial loans exist but are less common, typically offered only to businesses with exceptionally strong credit and financials, and usually carry higher interest rates.

Structure & Terms

* Term: Can vary significantly: short-term (less than 1 year), intermediate-term (1-3 years), or long-term (often 3-25 years, especially for real estate).
 
* Repayment: Usually involves regular (monthly or quarterly) payments of principal and interest. Amortization schedules can vary (e.g., fully amortizing, partially amortizing with a balloon payment at the end).
 
* Interest Rates: Can be fixed (rate stays the same for the loan term) or variable/floating (rate changes based on a benchmark index like Prime Rate or SOFR). Rates are typically higher than prime residential mortgage rates but lower than unsecured consumer loans or credit cards.
 
* Fees: Often include origination fees, application fees, underwriting fees, and potentially prepayment penalties.

Creditworthiness:

*   Business and owner(s) credit history and scores.

*   Business financial statements (Profit & Loss, Balance Sheet, Cash Flow Statement) – often several years’ worth.

*   Business plan and projections.

*   Debt Service Coverage Ratio (DSCR): A key metric showing if the business generates enough cash flow to cover loan payments (typically needs to be >1.25x).

*   Collateral value (Loan-to-Value ratio – LTV).

*   Business history and industry stability.

*   Personal guarantees from business owners are very common, especially for small and medium-sized businesses (SMBs).

Providers:

    *   Traditional banks (large national banks, regional banks, community banks)

    *   Credit Unions (often for smaller businesses)

    *   Commercial finance companies

    *   Online lenders / FinTech companies

    *   The Small Business Administration (SBA) – guarantees portions of loans made by partner lenders, making them less risky for the lender.

    *   Private lenders / debt funds